Wisdom of Jesse Livermore 6

Legendary speculator Jesse Livermore is surely one of the most fascinating
characters in all of financial-market history.

About a century ago Jesse Livermore blossomed into one of the most celebrated
speculators of all time. He was trading heavily in the early decades of the
1900s, a wondrous era to speculate in stocks. His renowned exploits are still
viewed with great awe and reverence by today's elite speculators and his towering
speculation wisdom will stand tall for ages to come.

If you are interested in more background information on Jesse Livermore and
my reasons behind writing this series of essays on the man's awesome speculation
wisdom, you may wish to skim the introduction of the first
essay in this series.

Mr. Livermore's exploits were recorded in the greatest book on speculation
of all time. Originally published in 1923, it is called "Reminiscences of a
Stock Operator" and was written by a gifted financial journalist named Edwin
Lefevre. Mr. Lefevre penned the account as if from the first-person perspective
of a fictional trader named Larry Livingston. As Lefevre had spent weeks extensively
interviewing Jesse Livermore, market historians are virtually unanimous in
viewing Lefevre's classic book as a thinly-disguised biography of Livermore's
trading life.

Today "Reminiscences of a Stock Operator" is fondly read with awe by speculators
of all levels and abilities all around the globe. I have personally read the
book many times and I try to re-read it at least once a year now. The speculation
wisdom contained within these magical pages is just awesome and truly priceless
for all speculators to digest.

If you are interested in speculation and you haven't read the book yet you
owe it to yourself to buy it today at Amazon or Barnes & Noble.
I can almost guarantee that it will forever change you as a speculator and
help you soar to new heights of understanding of the game and achieving real-world
success.

Jesse Livermore's words and experiences are so endearing and powerful because
he presents himself as just another mere mortal like you and I, with hopes,
fears, and frailties. He is brutally honest in critiquing his own evolution
as a speculator and thoroughly explaining his own mistakes and the great wisdom
they ultimately led to.

In this series of essays Jesse Livermore's wisdom is presented chronologically
from the book. All the bold-faced passages below are his words directly out
of Lefevre's book, while the following normal text is my own feeble thoughts
and commentary attempting to pull Livermore's wisdom a century into the future
to today. Before every quotation below, the chapter in "Reminiscences" from
which it is pulled is noted so you can quickly find it and dig deeper by reading
the valuable surrounding background context if you wish.

I hope and pray that you find Jesse Livermore's awesome wisdom as exciting
and valuable as I have!

(Chapter V) ... "The customers, who were all eager to be shoved and forced
into doing things so as to lay the blame for failure on others..."

In a wonderfully entertaining narrative about a battle-hardened and wealthy
old speculator named Mr. Partridge, Jesse Livermore exposes one of the most
dangerous character flaws a speculator can have, a lack of absolute personal
accountability and responsibility. Unless a speculator takes full personal responsibility
for all of the trades that he chooses to make, win, lose, or draw, he
will never achieve great success.

Just as today, the majority of speculators back in Mr. Livermore's time wanted
to congenitally blame others for their own trades that turned sour. Rather
than accepting the full weight of their own decisions, they desperately wanted
their brokers or advisors to push them into trades so these speculators could
avoid accepting the responsibility themselves for failed trades. Elsewhere
Livermore talks about speculators perpetually blaming external manipulation
for their own bad bets, another way of refusing to accept full responsibility
for the fruits of their own actions.

Just like a child who never learns to be responsible, a speculator who cannot
fully accept any possible outcome on any trade that he freely chose to
make is doomed to immature mediocrity. If you or I use our own God-given brains
and decide to execute on a particular trade, we cannot blame anyone else but
ourselves if the trade doesn't work out. It doesn't matter where the information
came from that led to the trade, it is ultimately the responsibility of the
individual speculator who decided to execute on this information regardless
of the outcome.

So before you freely choose to launch a trade, while you are gathering information
and running reconnaissance, realize that you most hold yourself absolutely
accountable for your own decision. If you win, great, congratulations and many
kudos on another successful trade! If you lose however, the loss is your fault
alone and your responsibility alone since you freely chose to make the trade.

Every speculator must always be ready to win or lose on each and every
trade, and to fully accept responsibility for their own decisions always.
Losses are simply part of this grand game and just have to be accepted, since
no one but God can see the future before it happens. When you freely choose to
pull the trigger on your own trade, the outcome is always 100% your own responsibility
and no one else's. If you cannot accept this truth, then you shouldn't be speculating.

(Chapter V) ... "I think it was a long step forward in my trading education
when I realized at last that when old Mr. Partridge kept on telling the other
customers, "Well, you know this is a bull market!" he really meant to tell
them that the big money was not in the individual fluctuations but in the
main movements - that is, not in reading the tape but in sizing up the entire
market and its trend."

In all of "Reminiscences" this crucial idea that the Really Big Money is always
earned by prudently riding the large trends over time and not in day trading
every minute fluctuation is one of the central themes of the book. Livermore
hammers this again and again, attacking it from countless angles and spicing
up all of his amazing lessons with his own enthralling personal experiences.

This old and successful speculator that Livermore mentions, Mr. Partridge,
would always politely tell the younger speculators who asked him trading questions
that it was a bull market. The young speculators were always eager to trade,
but Partridge was old and battle-scarred enough to know that no mere mortal
could even hope to catch every individual fluctuation so the wisest strategy
was just to ride the major trends. His simple reply, which would annoy the
youngsters since they couldn't yet perceive the deep wisdom in it, was to subtly
advise them to just ride the primary trend and not worry about rapid-fire trading.

If a particular market happens to be in a primary bull trend, then just be
long and don't worry about trying to interpret and trade upon the essentially
random day-to-day market noise. If a particular market is in a primary bear
trend, then either sit out in cash or stay short and wait for the trend to
fully mature and run its course. Don't try to frantically outguess the primary
trend everyday, just accept it and trade with it and you will win in the end.

And this leads into what is perhaps the most famous quotation out of the entire
book, Jesse Livermore's legendary "be right and sit tight" wisdom! While a
long quotation, I just have to offer this entire paragraph in its original
shining unedited brilliance...

(Chapter V) ... "And right here let me say one thing: After spending many
years in Wall Street and after making and losing millions of dollars I want
to tell you this: It never was my thinking that made the big money for me.
It always was my sitting. Got that? My sitting tight! It is no trick at all
to be right on the market. You always find lots of early bulls in bull markets
and early bears in bear markets. I've known many men who were right at exactly
the right time, and began buying and selling stocks when prices were at the
very level which should show the greatest profit. And their experience invariably
matched mine - that is, they made no real money out of it. Men who can both
be right and sit tight are uncommon. I found it one of the hardest things
to learn. But it is only after a stock operator has firmly grasped this that
he can make big money. It is literally true that millions come easier to
a trader after he knows how to trade than hundreds did in the days of his
ignorance."

Be Right and Sit Tight! Marvel at Jesse Livermore at his finest! Like so many
great truths in life this is so simple to understand, but so incredibly difficult
to actually act out and walk the walk. So much of speculation really boils
down to patience, that extraordinarily difficult trait to acquire. Do your
research, determine the primary trend, deploy your positions, and then just
hurry up and wait.

The patient and prudent contrarian speculator usually wins in the end, but
the whole modern financial-market arena is configured to award impatience.
From 24/7 financial television to 3-second guaranteed executions on Internet
trades to after-hours trading, our modern market environment is cunningly designed
to nurture a culture of continuous frantic trading. The brokerages and
financial industry love this go-go focus because they make money on
each and every trade, and higher trading volume leads to much higher Wall Street
profits.

Most individual speculators also love this light-speed market culture, primarily
because we speculators tend to be adrenaline junkies. It doesn't matter whether
you are buying or selling, it doesn't matter whether your trade is big or small,
but whenever your finger hovers a quarter inch above your mouse button and
you are ready to pull the trigger and execute a trade the adrenaline rush and
euphoria are simply awesome. Let's face it, trading is fun and addictive!
The very act of trading is a rush!

Yet, a truly great speculator must transcend and rise above this frenetic
market culture. Rather than getting all caught up in the incessant hype, a
speculator must carefully cultivate patience. He must figure out the
primary market trends, deploy positions somewhere near the beginning, and then
steadfastly ignore all the market noise and huge temptations to overtrade
until the primary market trends appear to be ending. This is very easy to understand,
but exceedingly difficult to actually accomplish in the real world.

The key to being able to actually act out Be Right and Sit Tight in your own
real-world trading is to relentlessly nurture your own patience. According
to the Bible (Romans 5:3), patience is learned through tribulation, which is
suffering. I think a great part of the education of a speculator is tribulation,
the agony of defeat in losing precious capital in bad trades, as well as the
psychological anchor of being caught wrong by the markets. Learning to speculate
is certainly not an easy or trivial undertaking!

But as these painful lessons accumulate, as a speculator suffers, gradually
they learn. Jesse Livermore characterized
this process as, "And when you know what not to do in order not to lose
money, you begin to learn what to do in order to win." The entire education
of a speculator ultimately leads to the elusive and prized emotion of patience,
which is so difficult to cultivate yet so priceless to possess. Only the abnormally
patient command the crucial internal discipline and peace necessary to Sit
Tight.

Jesse Livermore continued, right after the quotation above...

(Chapter V) ... "The reason is that a man may see straight and clearly
and yet become impatient or doubtful when the market takes its time about
doing as he figured it must do. That is why so many men in Wall Street, who
are not at all in the sucker class, not even in the third grade, nevertheless
lose money. The market does not beat them. They beat themselves, because
though they have brains they cannot sit tight."

Every speculator has been in the situation Jesse Livermore describes, probably
many times. You diligently do your research, you are convinced that the markets
are almost certain to head in a particular direction, but then they stubbornly
don't conform to your plan. At first this is no big deal, but after a couple
months of the markets not behaving all kinds of nagging doubts relentlessly
assault the speculator.

Even if the speculator is dead right about the long-term, if he can't sit
tight over the short-term stress he is already sunk. While there is a
fine line between having courage in your own convictions on the markets and
just being belligerently wrong indefinitely, having the patience to sit tight
when you are right is so incredibly important. If you are right on the
primary trend and know it but the short-term fluctuations are moving
against you, dig deep and summon the courage and patience to sit tight and
wait for the major trend to reassert its dominance once again.

It takes a great deal of speculation experience, a lot of learning through
a lot of challenging market conditions, to cultivate this patience and inner
peace necessary to sit tight when the markets are making you look like a fool
over the short-term. Nevertheless, the ultimate returns to be earned by developing
this serene patience necessary to sit tight through difficult short-term adversity
are breathtaking. Only the truly patient have a shot at the really big money
which Livermore describes!

As I believe that this entire extended passage of "Reminiscences" is so profound
and mind-bogglingly important, once again Jesse Livermore continues in the
very next paragraph...

(Chapter V) ... "Disregarding the big swing and trying to jump in and
out was fatal to me. Nobody can catch all the fluctuations. In a bull market
your game is to buy and hold until you believe that the bull market is near
its end. To do this you must study general conditions and not tips or special
factors affecting individual stocks."

As Jesse Livermore points out from his own hard-won experience, regardless
of which market you are trading the game is to discern the primary trend and
ride it from reasonably close to the beginning to reasonably close to the end.
Trying to actively trade every small fluctuation and always outguess the markets
is suicidal for capital and highly counterproductive.

While large fluctuations running many months can sometimes be successfully
traded, the probability of success for intra-trend trading shrinks dramatically
with trade duration. For example, if you initiate a trade running with a sub-trend
that you expect to last for six months inside of a larger primary trend, you
probably have a decent chance of success. But if you launch a trade on a trend
that you expect to run for only six days, your probability of success
is vastly lower. The shorter the trade duration, the more it is tormented by
maddening market randomness and the less value logical and sound analysis has.

Being right on the primary trend and sitting tight until the end is a macro exercise.
Livermore points out that the game is not won by getting bogged down in individual-stock
analysis, but by studying general-market conditions as a whole. While it is
certainly interesting to study individual stocks as many have wonderful stories
to tell, these stocks will almost always move up or down with the fortunes
of the markets as a whole. So it makes great sense to devote more time to studying
the general markets than to individual stocks.

The prudent and patient contrarian speculator will study the big market picture
and trade with the major trends that are running many months or years.
And once his positions are deployed, he will zealously sit tight until he thinks
that he sees the beginnings of reversals in the major trend that he is trading.
This Livermore-esque speculator does not allow himself to be tempted by short-term
fluctuations and remains intensely focused on the large primary trends.

(Chapter V) ... "One of the most helpful things that anybody can learn
is to give up trying to catch the last eighth - or the first. These two are
the most expensive eighths in the world. They have cost stock traders, in
the aggregate, enough millions of dollars to build a concrete highway across
the continent.

This passage, right after the paragraphs above in "Reminiscences", warns speculators
about the deadly perils of greed in opening and closing trades. While Jesse
Livermore was talking about longer-term trading here, riding entire primary
bull or bear trends to completion, there are also valuable short-term lessons
for speculators to learn.

On the longer-term macro trades, Livermore's original context for this quote,
he wisely advises speculators to not grow greedy. You don't have to buy in
at the very bottom of a long-term trend, just somewhere reasonably near it.
Similarly you don't have to try and sell out at the very top, just somewhere
reasonably close to it. It is impossible to precisely catch the exact long-term
bottoms and tops of any major trend and the ultimate cost of gaming these in
capital and grief is enormous.

The price of trying to capture the last eighths in macro trades is far too
high for the benefits won in those elusive rare times when a speculator is lucky enough
to be nearly exactly right. Getting greedy over the exact entry and exit prices
causes all kinds of problems, delaying prudent execution and interfering with
your carefully cultivated speculator's instinct of when to get in and out.
When you feel that the time is right, just act and make the trades without
fretting about holding out for a small additional discount or profit.

This also really applies to the short-term. If today, for example, looks like
a good day to deploy a position to ride a major trend, then just buy the position
now and get it over with. Don't worry about holding out for a price a few pennies
lower than what the market is offering now. Buy when you feel that it is time
to buy and sell when you feel that it is time to sell, but don't waste your
time and capital hunting down those elusive last eighths. Hunting for them
will ultimately cause you far more trouble than they are worth!

Well, unfortunately this is all of Jesse Livermore's wisdom that fits into
this sixth essay of my series on "Reminiscences".
I hope you found Mr. Livermore's great wisdom enlightening!

Go buy and read "Reminiscences
of a Stock Operator" today! I can almost guarantee that it will forever
change your life as a speculator! Jesse Livermore's quotes are even more
impressive in their proper context and are delightful to read and digest.
This essay format can't even start to do them justice.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
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